Value Investing In Sideways Markets

Here are slides of my updated/revised presentation on sideways markets. Over the last three months I’ve given talks on sideways markets three times, to CFA Societies in South Florida, New Zealand, and Atlanta. It is very hard to be excited about the US stock market. I read that Rich Bernstein, former chief investment strategist at Merrill Lynch, is very optimistic about US stocks; he believes we are at a point similar to where the market was in 1982 – at the beginning of the 1982-2000 secular bull. After you’ve gone through my slides, you’ll understand why it is so hard for me to share Rich’s excitement.

Stocks were so expensive in 1999 that 12 years of economic growth did not cure the excesses of overvaluation. In fact, 12 years into this sideways market, valuations are still 30% above the historical average, while in 1982 they were about 30% percent below average! Also, historically, stocks spent a good amount of time at below-average valuations before sideways market turned into a secular bull market.

I hear that everyone is bearish, then I recall a line from a movie – would you rather believe me or your own eyes? Well, my own eyes tell me that the market is up this year, so not everyone is bearish. Higher taxes and lower government spending (which is good in the long run) are destimulating for the economy, so it is reasonable to expect slower growth going forward. Then you look at corporate profit margins, which are at an all-time high (see my presentation). Lower top line growth and declining corporate margins will lead to subpar earnings growth, so stocks are still expensive. No, I don’t share Rich’s excitement about the stock market. All that being said, there are stocks that we are excited about, though it is becoming more and more difficult to find them.

I am done with traveling for a while. Except in early January, when I am going for a few days to NYC, for my brother-in-law’s wedding. I am ready for the ski season!